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Tuesday, 16 June 2009

Customer-centric strategy ensures better Islamic funds: Al-Khabeer

JEDDAH - The global financial crisis that sent the conventional banking system reeling turned out to be a classic case of “a blessing in disguise” event for the Islamic financial system as it demonstrates to be a more viable and safe form of managing assets.

Recent data showed heightened interest in Islamic securities products which are spreading rapidly as a result of the “defects and faults” in the conventional system. Nowadays, the Islamic mutual funds industry is one of the fastest growing segments of the overall financial sector.

Andrew C. Broadley, chief executive officer, Al-Khabeer International B.S.C. (c), pointed out that total assets under management (AUM) by global Islamic funds industry totaled $44 billion, according to the 3rd annual Ernst and Young report.

Speaking at a “Scientific Forum on Asset Management from Islamic Perspective” held on Wednesday at King Abdul Aziz University - Jeddah, the chief executive of Al-Khabeer International noted however that “the concentration of Islamic funds has mainly been in the GCC and Malaysia, adding that “there is a lot of unfinished business in other countries.” He said the six GCC countries manage over 81 percent of the global Islamic fund AUM, which, according to CIA World Factbook data “are home to only 3.3 percent of the global Muslim population.

According to Ernst & Young’s Islamic Funds & Investments Report, the largest concentration of Islamic funds remains in the Middle East and equity funds lead the field for choice of asset type. The report said 19 percent and 23 percent of Islamic funds are domiciled in Saudi Arabia and Malaysia, respectively. Saudi Arabia holds $19.28 billion in total assets under management for Islamic funds. Malaysia holds $4.579 billion in assets.

The report further said that Shariah sensitive investable assets in the GCC and Asia touched $736 billion in 2008 compared to $267 billion in 2007. This translates into a potential annual revenue pool of $3.86 billion for the Islamic asset management industry, it added.

In his presentation, Broadley pointed out that the opportunity for growth in Islamic asset management was intense even before the financial crisis surfaced. He said that out of 500 affluent investors surveyed in Saudi Arabia in 2003, 90 percent expressed the importance of Shariah-compliant investment and 65 percent “would use Shariah-compliant products even if I have to compromise some return or service quality.” He further said that Islamic investment vehicles are gaining popular appeal these days as they are regarded as “ethical investing” tools.

In Islamic asset management, he said relations between the managers and the clients are founded on “deep faith” where “value for money” is anchored in “honesty, truthfulness and transparency.”

Nonetheless, the CEO of Al-Khabeer International said “that many Islamic fund managers are (still) failing to translate investor needs into viable investment funds.”

He noted that there is “uniformity of investment style” such that equity funds are typically all relative return funds with performance clustered around the index… with insufficient management of downside risks.”

He further argued that “lack of alignment of interests of fund manager and investor, high fixed management fees and no segregation of duties of custodianship and administration from fund management” contribute to inability to satisfy investor’s needs.

Al-Khabeer International addresses the needs of institutional and high-net-worth clients who require Shariah-compliant private equity, asset management and capital market products and services.

In order to boost the performance of Islamic equity funds, which “has been mediocre” in the Kingdom, Al-Khabeer believes that the “best solution lies in managing funds with a dual focus on both risk and return.”

For Al-Khabeer, an alternative strategy would be “managing for the total return over an economic cycle, combining alpha generation from bottom-up stock selection with flexible asset allocation and strong operational risk controls,” Broadley emphasized.

“The ultimate goal is to lock in profits and limit the downside to an acceptable risk budget,” he pointed out.

The CEO of Al-Khabeer emphatically said that success could best be achieved by staying focused on addressing the specific needs of investor based on research.

He said Al-Khabeer’s “unique customer-centric strategy” would position the company to build better funds “faster than the competitors.”

He added that Al-Khabeer exercises “due diligence” to ensure that each fund is “very high quality” and “keep our fund sizes small and fairly price.”

It is essential that there is an “alignment of faith” between the fund managers and the clients, Broadley underscored, saying that in Al-Khabeer, “we (intend to) invest our own capital in the funds, so that we are aligned with our customers.” “We can focus on being the best in the industry and provide the total solutions that a growing number of clients seeks,” he added.

“The expected consequence of our vision is the establishment of a business which is capable of enduring for the long-term, the nature of the business cycle notwithstanding,” he concluded.